How Paying Your Estimated Taxes Will Help you to Avoid Paying a Big Tax Bill

What are Estimated Taxes?

An estimated tax is an amount paid to the Internal Revenue Service (IRS) on income that is not subject to withholding, which includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards.

Who is Required to Pay Estimated Taxes?

Anyone who does not have withholding tax taken out of their income is required to pay federal estimated taxes. If you are self-employed, you generally have to make federal estimated tax payments if expected to owe tax of $1,000 or more when filing a return.

Anyone filing as a corporation generally has to make federal estimated tax payments for the corporation if it is expected to owe tax of $500 or more when filing its return. For more information and details on who must pay federal estimated taxes, see the worksheet in Form 1040-ES. Some states also require payment of estimated taxes, so be sure to check with your state to determine is you are required to make payments.

How to Calculate Your Estimated Taxes?

To calculate your federal estimated tax, you must determine your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. You can use the worksheet in Form 1040-ES to figure your federal estimated tax. Be sure to estimate your income as accurately as you can to avoid penalties.

When to Pay Your Estimated Taxes.

Taxpayers can pay their federal and state estimated taxes throughout the year at any time. It is best to pay as you go to avoid having to pay a larger tax bill. Pay as you go means to pay your taxes during the year as you receive income rather than waiting to pay it all at the end of the year. It is better to pay your estimated taxes quarterly because this method helps to reduce the risk of the underpayment which results in a penalty.

Where to Pay Your Estimated Taxes?

To pay your federal estimated taxes, you can use the Electronic Federal Tax Payment System (EFTPS). You can also pay by check by making a check out to the “United States Treasury” and indicating the tax year and type of taxes they are paying. For more payment options, visit IRS.gov/payments.

If your state requires you to pay estimated taxes, check with your state to determine where and how to submit your payment.

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